CANADA FX DEBT-C$ knocked down, hit by equity slide

TORONTO, Oct 31 (Reuters) - The Canadian dollar, along with most major currencies, dropped versus the U.S. dollar on Friday, hurt as equity markets fell due to renewed fears of global recession.

Bond prices rose as investors sought secure government debt in the face of a stock selloff and data from Canada that showed the economy shrank in August.

At 9:45 a.m. (1445 GMT), the Canadian unit was at C$1.2298 to the U.S. dollar, or 81.31 U.S. cents, down from C$1.2180 to the U.S. dollar, or 82.10 U.S. cents, at Thursday’s close.

The drop in the Canadian dollar followed three straight winning sessions that had lifted it to its highest level in 10 days.

The Canadian dollar has taken its cue from equity markets in recent sessions, rising when investors decided to take on riskier assets and falling as recession concerns convinced investors to liquidate assets and buy U.S. dollars.

“You almost don’t even have to look at the currency market, you just have to look at where equity futures show the market headed and you know the Canadian dollar will be down,” said Avery Shenfeld, senior economist at CIBC World Markets.

“It had a tremendous rebound after a tremendous crash and we are still in an extremely volatile period for the currency, which matches the volatility in the assets which it is now heavily correlated with.”

October has been a roller-coaster month for the Canadian dollar, which at one point skidded below 77 U.S. cents, its lowest level since September 2004. The currency then bounced back to scale 84 U.S. cents before dropping again on Friday.

BOND PRICES RALLY

Bond prices added to gains recorded in the previous session as the slide in equity markets overnight spilled over into the North American session and prompted a wave of demand for more secure assets like government debt.

The move followed a rally in the previous session when talk of another Bank of Canada rate cut surfaced following a wave of other central bank rate cuts this week in bids to help revive sagging economies.

The Bank of Canada cut its key rate by 75 basis points in October and is scheduled to make another rate announcement on Dec. 9. The overnight rate in Canada is 2.25 percent.

Also helping to support the rally in bond prices was a report that showed the Canadian economy shrank 0.3 percent in August because of weakness in the manufacturing, wholesale trade and energy sectors.

The Canadian overnight Libor rate LIBOR01 was 2.3250 percent, up from 2.2500 percent on Thursday.

Thursday’s CORRA rate CORRA= was 2.2518 percent, up from 2.2492 percent on Wednesday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.

The two-year bond was up 9 Canadian cents at C$101.56 to yield 1.978 percent. The 10-year bond rallied 53 Canadian cents to C$104.78 to yield 3.653 percent.

The yield spread between the two-year and the 10-year bond moved to 178 basis points from 173 basis points at the previous close.

The 30-year bond was up 95 Canadian cents at C$113.45 to yield 4.188 percent. In the United States, the 30-year Treasury yielded 4.251 percent. (Editing by Peter Galloway)